By Tiernan Ray

There’s a bit of a debate on the Street today about the fate of chip maker Broadcom (BRCM) with the revelation that competitor Qualcomm (QCOM) has pushed the company aside in selling the WiFi networking chip, known as a “combochip,” in the recently introduced “Galaxy S4 mini” version of Samsung Electronics‘s (005930KS) Galaxy S4 flagship smartphone.

Broadcom shares are down $1.37, or almost 4%, at $33.48.

Barclays Capital chip analyst Blayne Curtis, in a note to clients this morning, refers to the loss in “teardown” data provided by analysis firm Chipworks:

We were able to obtain a teardown of the just released Samsung Galaxy S4 mini (i9192), which is one of 3 variants (i9190 – 3G, i9192 – 3G dual sim, i9195 – LTE), and are updating our thoughts on the suppliers and implications. This is a mid-volume handset for Samsung with production of likely 1-2M/month. Pictures of the components supplied by Chipworks (www.chipworks.com) as well as a table outlining the ICs are in Figures 1-5. The biggest surprise here is the inclusion of a QUALCOMM WLAN combo (WCN3660A 802.11n chip) instead of a combo from Broadcom.

Curtis offers the following graphic of the chip teardown in the mini:

Curtis, who has an Underweight rating on Broadcom and an Overweight rating on Qualcomm, thinks Broadcom could lose further share in combo chips:

The inclusion of a QCOM WLAN combo shows (1) QCOM is not as far behind as many perceive, and (2) the mobile market is moving to a cost vs. performance focus as volumes move to the mid and low-end, which favors platform sales. QCOM already has a high attach rate of its WLAN on QRD platforms in Asia but this is the first indication that Samsung will move away from BRCM. Recall, HTC did use the WCN3660 in the HTC One X in late 2012 but we believe the general perception is that BRCM’s share is secure. We see this loss in the GS4 mini (the GS3 mini featured the BCM4334) as a sign that is not the case and that more share loss is to come for BRCM in 802.11n but also 802.11ac, as QCOM’s solution is likely to ship later this year to multiple OEMs such as Sony, Fujitsu, and HTC paired with the MSM8974 (S800). As we outlined in our April downgrade, we believe BRCM’s combo business (28-30% of rev) has unsustainable profitability (combo OPMs likely over 20%) and market share (70-80%) as the smartphone market matures. We see a loss of $0.50-1.00 of earnings power over the next 1-2 years as BRCM’s share and profitability decline through the shift to Asia/low-end, pricing pressure (platform pricing), and gradual share loss. Additionally, we would not rule out the potential for a marquee handset (Apple (AAPL) or Samsung) to eventually move to QCOM even as early as next year.

On the other hand, FBR Capital Market’s Christopher Rolland today reiterates a Buy rating on Broadcom, writing that because Samsung has been known to swap different vendors’ parts into and out of successive models of phones, “we believe definitive conclusions are premature, and we would tend to fade any extreme overreactions in these stocks today.”

He sees a small portion of Samsung units in which Qualcomm and U.K. vendor CSR Plc will be able to push out Broadcom:

Just last week, we highlighted that the acquired mobile connectivity division of CSR had finally produced working silicon and that Samsung was attempting to use the part for combo chip pricing concessions. This (rather dated) combo chip from Qualcomm may have been a precursor to this transition. However, we believe both the Qualcomm and CSR parts are 802.11n (not 802.11ac) and therefore Samsung may be reluctant to use them high-end flagship SKUs. Additionally, Samsung has increasingly been utilizing fully integrated Broadcom platforms for its low-end smartphone SKUs. Therefore, we identify only a small portion (less than 20%) of Samsung’s SKUs, where a discrete 802.11n connectivity part would logically displace Broadcom. We also understand that Broadcom’s Wi-Fi technology is generally superior to Atheros and that Broadcom combos will have integrated NFC.

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There are 2 comments

JULY 17, 2013 2:49 P.M.

Randy Jr wrote:

FBR Capital Market’s Christopher Rolland and their clients would like to UNLOAD broadcom so, wait, no downgrades yet !!!! else its crystal clear that BRCM is lossing against the QCOM......

JULY 17, 2013 3:40 P.M.

Boom Shaka Laka. Boom... wrote:

Whose chips does Blackberry use? Isn't it Broadcom? I ask. Is it not correct that Blackberry has cut their monthly BB10 production in half?

I read that Vancouver is the first city in North Anerica with safe injection sites. (SIS) And Toronto is deliberating to do so. Considering how Blackberry is doing. Maybe they should set up a bunch of safe injection sites around Waterloo and Blackberry. As I see it. Blackberry Chairman Barbara Stymiest is a board member at the Health Network. Yes. Ontario's Health Network. The only province in Canada where there's no Ombudsman control or oversight over children, the elderly in care or hospitals. C'mon babe. Let's see you innovate. You can turn that around. Hmm. Or what.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.